Payment and collection

In a memorandum issued on 30 May 2002, the Director of Defense Procurement, Ms. Deidre Lee, cautioned Department of Defense (DOD) paying officials about using fast payment procedures without first meeting all of the requirements of Federal Acquisition Regulation (FAR) section 13.402. (1) Ms. Lee noted that "[t]he fast payment procedure allows payment under limited conditions to a contractor prior to the government's verification that supplies have been received and accepted." (2) Federal Acquisition Regulation section 13.402 provides six conditions, however, which must be present before paying officials can use the fast payment procedures. (3)

The catalyst for Ms. Lee's caution was a Defense Finance and Accounting Service (DFAS) observation that paying offices had used fast payment procedures when there was no geographical separation or lack of adequate communications facilities that made it impractical to make timely payment based on evidence of government acceptance. The DFAS also observed that the receiving activities frequently would not forward it a copy of the receiving report as a follow-up to a fast payment. (4) Ms. Lee stated in her memorandum that "[i]n today's e-business environment, use of fast payment procedures should be employed only when payment must be made inside the United States for deliveries made outside the United States." (5) Ms. Lee ordered DOD components to review their fast payment procedures and ensure they "have the necessary internal controls in place and are complying with all the requirements of FAR 13.402." (6)

Garbage In, Garbage Out--Contracting Officers Should Structure Payment Terms Properly for Correct and Timely Payment

A couple of weeks after issuing the fast payment procedures memo, Ms. Lee issued another memorandum, this one emphasizing that contracting activities need to input payment and delivery information into automated systems properly, so that contractors receive correct and timely payments. (7) Ms. Lee's 11 June 2002 memo reminded DOD components of the following contract formation issues that may cause delays in payment:

   (1) CLIN [Contract Line Item Number]
   structure inconsistent with contractors' shipping
   [and] billing methods;

   (2) Unit pricing by lot when contractor[s]
   could deliver separately priced items as partial
   shipments; and

   (3) Requirement description by reference to
   the contractor's proposal when receiving,
   accepting and paying activities may not have
   that information. (8)

Ms. Lee placed special emphasis on contracts with commercial suppliers inexperienced with government business processes:

   We must ensure that our contracts are written
   clearly with all the information necessary for
   receipt, acceptance, and payment (including
   the military address for delivery) so that
   commercial suppliers receive timely payment
   and are more likely to continue to do
   business with the Department. (9)

Ms. Lee also advised contracting officers to consider recently added GSA schedule items on the DOD E-Mall because commercial suppliers may find this automated ordering procedure more familiar than the traditional purchase order system. (10)

From a DOD efficiency standpoint, Ms. Lee noted that the DOD "cannot afford to use scarce human resources to manually reconcile inconsistent information, or to search for missing information." (11)

"Count Your Change!" GAO Releases Yet Another Report Saying That DOD Overpayments Continue

Department of Defense overpayment problems are nothing new for the GAO, which initially reported on DOD contractor overpayments in 1994. (12) As last year's Year in Review noted, the GAO recently issued several more reports criticizing government payment and collection systems. (13) In May 2002, the GAO released yet another report indicating that DOD officials continue to make overpayments on contracts. (14) While the GAO noted that the DOD had begun several initiatives to reduce overpayments, it also reported as follows:

   [The DOD] still does not yet have basic
   accounting control over contractor debt and
   underpayments because its procedures and
   practices do not fully meet federal accounting
   standards and federal financial system
   requirements for the recording of accounts
   receivable and liabilities. As a result, DOD
   managers do not have important information
   for effective financial management, such as
   ensuring that contractor debt is promptly collected. (15)

Overall, DFAS Columbus records revealed that the DOD made approximately $488 million in overpayments during fiscal year (FY) 2001. (16)

"We Are Here to Help!" Congress Requires Agency Programs for Identifying Payment Errors

Last year's Year in Review noted that Representative Dan Burton introduced the Erroneous Payments Recovery Act of 2001 to address government overpayments. (17) This legislation eventually gave birth to section 831 of the National Defense Authorization Act for FY 2002. (18) Section 831 amended Title 31 of the U.S. Code (19) to require that the head of each executive agency with contracts totaling over $500 million in a fiscal year establish a cost-effective program for identifying payment errors and for the recovery of overpayments. (20) Major Kuhn.